Political maneuvering to short-circuit the Financial Accounting Standards Board's plan for stock option expensing could derail efforts to create a convergence of international accounting standards, European professional leaders warned Congress.
Testifying before the Senate Banking Committee, International Accounting Standards Board Chairman Sir David Tweedie said that a convergence of the standards developed by his group and FASB's generally accepted accounting principles would be a development of "immense significance" for improving financial reporting throughout the world.
"Though there are doubters on both sides of the Atlantic," Tweedie said that convergence of FASB and IASB accounting standards could succeed if it continues to be a two-way process with both sides willing to make changes.
For its part, Tweedie said that the IASB has "brought many international standards into line with U.S. GAAP," including his board's new standards on business combinations, which eliminated the pooling method and the amortization of goodwill. FASB, in turn, "has proposed bringing the U.S. requirements for accounting for stock options into line with the international standard," he noted.
That proposal, however, has stirred a firestorm of controversy among U.S. industries that rely on stock option compensation to attract key employees, and has prompted legislation in Congress to block FASB's plan.
In his testimony, Tweedie warned the committee that "if convergence is to succeed, we must resist attempts to reject standards through political processes, rather than the standard-setting process, when local or regional interests perceive adverse consequences in particular standards."
Although Tweedie acknowledged the right of national legislatures to examine the rules developed by standards-setting boards, the IASB chairman warned that "if political pressures in a national or regional context are able to overrule standards that have been developed in a deliberate and open manner, then it may lead to a system of 'beggar thy neighbor,' which will not produce the consistency and quality of accounting standards that the world's markets demand."
Tweedie's concerns were echoed by other foreign standard-setters at the hearings, including the United Kingdom's Financial Reporting Council chief executive, Paul Boyle.
The FRC is "very encouraged by the expression of commitment on the part of the authorities in the U.S. to the process of international convergence," and "very much hope that the U.S. can remain committed to that goal," he told the Senate.
But to achieve "a single set of high-quality accounting standards for use in all of the world's capital markets," Boyle said that it would be important that the decisions concerning those rules be made by "independent standard-setters, following due process and free from political influence."
Senate Banking Committee chairman Richard Shelby, R-Ill., agreed that politicians in Europe and the U.S. should avoid meddling in the process of developing an internationally agreed-upon set of standards. "Although differences will inevitably arise during the convergence process as local jurisdictions promote particular interests," Shelby said that it would be important "to insulate the convergence process from regional political calculations."
"To the extent that political pressures compromise the process, there is a risk that we fall behind global developments and our standards are seen as inadequate," he said. "If this occurs, U.S. companies may suffer the consequences of less liquidity and restricted access to capital."
SOX around the world
There was less agreement during the hearings on whether the two-year-old Sarbanes-Oxley Act will promote or hinder international agreement on global accounting rules.
Several witnesses told the panel that SOX has already had a positive spillover effect on the accounting standards of foreign countries.
Calling the U.S. accounting reforms "a catalyst for positive change in accounting and financial reporting throughout the world," the IASB's Tweedie said that, since SOX was enacted, "many other countries have undertaken similar reforms, and in Europe and elsewhere many of the principles of the Sarbanes-Oxley Act have been adopted."
Others, however, maintained that SOX rules have had negative effects on many companies both in the U.S. and abroad.
Although the law "heightened awareness around the world of the scope of directors' fiduciary responsibilities," it has also sparked "industry concern over the rising costs of compliance with increased regulatory requirements, not only in monetary terms, but also in terms of manpower and information technology development," Andrew Sheng, chairman of Hong Kong's Securities and Futures Commission, told Congress.
"Some feel that the requirements are restrictive and excessively onerous in nature, compared to corporations that do not have to comply with Sarbanes-Oxley," he said.
Even more troubling than the compliance costs is the "perfect storm of liability risks unleashed by Sarbanes-Oxley" on new public companies, Greg Bentley, president and chief executive of Bentley Systems, told the committee.
His family-owned, Pennsylvania-based company abandoned plans for an initial public offering due to concerns that SOX provisions would encourage a flood of shareholder lawsuits whenever corporate earnings prove to be disappointing.
"Unfortunately, Sarbanes-Oxley has increased the very real apprehension that hair-trigger plaintiffs' lawyers will misuse the act's standards to exploit these 'gotchas' as windfall opportunities," Bentley said.
Without some litigation reform to address "the excessive risk aversion" that SOX has engendered, "growing and prospering companies like Bentley Systems will assuredly remain private indefinitely," he told Congress.
